Industry Odisha Bureau, Aug 26: The US market dynamics have always influenced the Indian bond markets closely. The current scenario of India’s 10-year government bond yield and the US 10-year T-bill yields have narrowed down sharply impacting the foreign investors and even the RBI’s monetary policy.
The Indian bond yield is around 6.87 percent, while the US 10-year Treasury yield is in the 4.6-4.7 percent bracket. This gap of 2.2 percent roughly translating to 210-230 basis points indicates the domestic market is doing good.
The yield spread is significant for investors especially overseas, making it a decisive factor. The US bond 10-year Treasury bills have shown upward growth with respect to the pandemic-era. While the domestic market is going stable, the gap in the 10 year bonds have narrowed down.
How does the narrowing gap impact investors
For overseas investors, return from the Indian G-secs accounts for the added cost of rupee depreciation and the cost of hedging the currency. If the rupee declines even marginally, the additional return for the investors will be at stake making the domestic debt market sensitive.
The current rapport of the India-US bond yields is safe, but any further change can derail the market equation. Suppose, Indian yields continue to be stable, while the US yields rise, the yield spread will decrease. This will result in costlier trade in the Indian markets.
To summarise, the foreign investors will have to pay the consequences of hedging if any further narrowing in the yield spread occurs paired with the depreciation of INR.
The India-US 10-year bond yield spread narrowed to around 210 basis points, is largely due to the treasury yields staying elevated in Washington.
RBI and its prudential measures
As a prudential norm, RBI is compelled to abstain from reducing repo as easing further would narrow the gap more. It is noteworthy that recently special FCNR (B) benefitted India with a large source of USD inflows. But the sweet time is short-lived. RBI has brought down the special window closing date to August 31 from September 30.
Only some miraculous dollar inflows can keep the equation balanced and ensure reasonable return margin for the investors.
The apex bank has a strong reserve of foreign exchange accumulated but with uncertainty of geopolitics can make things tough. As the Brent crude oil rose to $ 90-100/ barrel, fluctuation in trade deficit and forex reserve can be expected any time.
